CommScope is a global supplier of telecommunications and networking equipment infrastructure. In closing its acquisition of Arris International (including its subsidiary Ruckus Networks) in April 2019, it has positioned itself for a turnaround from slightly declining sales and profits the past two years to a likely growth trajectory this year and beyond. Current valuation metrics are at historic lows, so the opportunity to revert to higher valuations is likely. Of the thirteen analysts covering CommScope, ten rate is as Buy or Outperform, three rate it a Hold, and none rate it a Sell, and their average 1-Year price target is $25. Finally, the CEO and CFO have been constructive and confident in their comments about the acquisition and their company's future prospects.
As detailed below, there is potential for a +5.2% absolute return in 38 days (equivalent to a +50.2% annualized return-on-investment).
CommScope Holdings Co. Inc. (COMM) -- New 100% Cash-Secured Puts Position
Selling 100% Cash-Secured Puts is synthetically equivalent to Covered Calls (when executed at the identical strike price and options expiration date). In this case, Puts were chosen because of their better options liquidity (and thus tighter bid/ask spread). The open interest at the $15.00 strike price for the Puts was 942 contracts but only 31 for their counterpart Call options. The transaction was as follows:
07/10/2019 Sold 5 COMM August 16th, 2019 $15.00 100% Cash-Secured Put options @ $.80
Note: the price of CommScope stock was $15.56 when this transaction was executed.
The Covered Calls Advisor does not use margin, so the detailed information on this position and a potential result shown below reflect the fact that this position was established using 100% cash securitization for the five Put options sold.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $7,500.00
= $15.00* 500 shares
Net Profit:
(a) Options Income: +$391.70
= ($.80* 500 shares) - $8.30 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If CommScope stock is above $15.00 strike price at Aug 19,2019 expiration): +$0.00
= ($15.00-$15.00)* 500 shares
Total Net Profit (If COMM stock price is above $15.00 strike price at Aug 19th options expiration): +$391.70
= (+$391.70 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return: +5.2%
= +$391.70/$7,500.00
Annualized Return: +50.2%
= (+$391.70/$7,500.00)*(365/38 days)
The downside 'breakeven price' at expiration is at $14.20 ($15.00 - $.80), which is 8.7% below the current market price of $15.56.
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the August 19th options expiration) for this CommScope short Puts position is 62.0%. This compares with a probability of profit of 50.4% for a buy-and-hold of CommScope shares over the same time period. Using this probability of profit of 62.0%, the expected value annualized return-on-investment (if held until expiration) is +31.1% (+50.2% * 62.0%), a very attractive risk/reward profile for this relatively conservative investment.
